BUY-BACK OF SHARES: COMPANIES ACT 2013 & COMPANIES

AMENDMENT ACT 2020

AUTHOR :CMA (DR) SIVAKUMAR A

https://taxguru.in/company-law/buy-back-shares-companies-act-2013-companies-amendment-act-2020.html

Share buy-backs are a strategic financial maneuver available to companies, governed by the Companies
Act, 2013 and Companies Amendment Act 2020. In this article, we delve into the provisions, regulations,
and procedures surrounding the buy-back of shares.

1. Power of company to purchase its own securities

Section 68

(1) A company can purchase its own shares out of-

a. Free reserves

b. the securities premium account

c. the proceeds of the issue of any shares or other specified securities

2. No Company shall purchase its own shares or other specified securities under sub-section (1) ,unless-

a. the buy -back is authorized by its articles

b. a special resolution has been passed at a general meeting of the company authorizing the buy-
back

c. the buy -back is 25% or less of the aggregate of paid-up capital and free reserves of the company .
But, if the equity shares are to be bought back, the amount involved in buy -back should not exceed
25% of the paid up equity share capital in that financial year.

d. the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is
not more than twice the paid-up capital and its free reserves.

e. all the shares or other specified securities for buy-back are fully paid-up.

f. the buy-back of the shares or other specified securities listed on any recognized stock exchanges is
in accordance with the regulations made by the securities and Exchange Board in this behalf.

3. The notice of the meeting at which the special resolution is proposed to be passed under clause (b) of
sub-section (2) shall be accompanied by an explanatory statement stating-
 a. a full and complete disclosure of all material facts

b. the necessity for the buy back

c. the class of shares or securities intended to be purchased under the buy-back

d. the time limit for completion of buy-back.

4. Every buy-back shall be completed within a period of one year from the date of passing the special
resolution.

5. The buy-back under sub-section (1) may be-

a. from the existing shareholders or security holders on a proportionate basis

b. from the open market

c. by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.

Section 68(10)

A company shall, after the completion of the buy-back under this section, file with the Registrar and the
securities and Exchange Board a return containing such particulars relating to the buy-back within thirty days of
such completion, as may be prescribed.

Notification No. S.O.5160 (E), dated 04-11-2022.

In case of financial products, financial services or financial institutions in an International Financial Services
Centre, in sub-section (10) of section 68, after the words, “Securities and Exchange Board”, the words “ or
International Financial Services Centers Authority, or both, as the case may be” shall be inserted—

2. SEBI (Buy-back of Securities) Regulations, 2018 shall apply to buy-back of shares or other specified
securities of a company in accordance with the applicable provisions of the Companies Act, 2013.

3. Methods of Buy-back.
 (Source: https://www.icsi.edu/media/webmodules/CM&SL.pdf)

4. Buy-Back Process.

1. Appointment of Merchant Bankers/ Registrars.

2. Filing the Resolution with SEBI/Stock Exchanges.

3. Public Announcement to be released in Newspapers and simultaneous filing with SEBI/Stock

Exchange.

4. Determination of offer price, opening and closure of Buyback offer.

5. Acceptance and payment to security holders.

6. Extinguishment of certificates and intimation to stock exchanges.

7. File the return with ROC/SEBI.

8. Merchant Banker to file final report with SEBI.

9. Issue of advertisement in National daily on completion of Buy-back process.

Accounting Treatment of Buy-Back of Shares

1. Fresh issue

The shares issued for buy-back, must not be of same kind of shares which are to be bought back. It means that if
equity shares are to be bought back then preference shares or debentures can be issued as a source of buy-back.
Similarly, equity shares can be issued for buy back of preference shares or debentures.

A. Issue of Preference shares

a. When Preference shares are issued at par

 Bank A/C…..Dr.

To Preference Share Capital A/C

b. When Preference shares are issued at premium

Bank A/C…..Dr.

To Preference Share Capital A/C

To Securities Premium Reserve A/C

B. Fresh Issue of Debentures

a. When Preference Debentures are issued at par

Bank A/C…..Dr.

To Debenture ….A/C

b. When Debentures are issued at premium

Bank A/C…..Dr.

To Debentures A/C

To Securities Premium Reserve A/C

c. When Debentures are issued at discount

Bank A/C…..Dr.

Discount on issue of Debentures A/C…Dr.

To Debentures A/C

2. Opening a separate Bank-account for the purpose of Buy-Back

(Rule 17(8) of the Companies (share Capital and Debentures) Rule, 2014

Buy-Back Bank A/C….Dr.

To Bank A/C

3.Buy -Back of Shares(when payment is made to the shareholders)

Equity Share Buy-Back Account …Dr.

Buy-Back Bank A/C….Dr.

4. Cancellation of Shares bought back

a. When Buy-Back is at par

 Equity Share Capital A/C …Dr.

To Equity Share Buy-Back A/C

b. When Buy-Back is at premium.

Equity Share Capital A/C …Dr.

Premium Payable on Buy-Back A/C

To Equity Share Buy-Back A/C

c .When Buy-Back is at Discount

Equity Share Capital A/C …Dr.

To Equity Share Buy-Back A/C

To Capital reserve A/C

5. Transfer to Capital Redemption Reserve

Where a company purchases its own shares out of free reserves or securities premium account ,a sum equal to
the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and
details of such transfer shall be disclosed in the balance sheet.

Securities Premium Reserve A/C…..Dr.

Free Reserve A/C…..Dr.

To Capital Redemption Reserve A/C

6. Adjustment of premium paid on Buy-Back

Securities Premium Reserve A/C…Dr.

General Reserve A/C…..Dr.

Statement of P/L …..Dr.

To Premium Payable on Buy-Back A/C

7. Buy -Back expenses

Buy -Back Expenses A/C…Dr.

To Bank A/C

Statement of Profit or Loss A/C….Dr.

To Buy-Back Expenses A/C

Conclusion: Understanding the intricacies of share buy-backs is crucial for companies navigating financial
strategies. The Companies Act 2013 and its 2020 Amendment Act provide a structured framework, and
adherence to regulations is key for a successful and compliant buy-back process.